Global currencies weaken in currency war against super US dollar; exporters gain

Central banks making moves to check appreciating currencies against US dollar

A number of central banks have been making moves to shake up their currencies over the past few months.

Faced with slowing global growth and lower inflation – disinflation or deflation in a number of countries – central banks started taking action primarily by cutting interest rates or injecting liquidity into the system.

From Japan increasing its monetary stimulus to Singapore putting the brakes on its currency’s appreciation against a trade-weighted basket of currencies, stemming currency appreciation has led to talk that a currency war could be brewing.

Using the value of currencies to boost trade-heavy economies has been the flavour, as global economic growth slows.

The International Monetary Fund cut its global growth outlook from 3.8% to 3.5% this year and with growth easing in China, Europe and a number of emerging economies, giving support to such economies has been the focus of governments.

The European Central Bank instituted its own quantitative easing (QE) policy on Jan 22 to get growth going in the European Union.

The effectiveness of that policy has been questioned, but the immediate result was that the euro, which has been weakening against the US dollar, continued to fall against the greenback.

With Japan flooding the market with liquidity to get growth and inflation going with its own QE, the result has been a marked weakness in the currency.

The yen’s steep depreciation against the dollar, according to reports, is causing uneasiness in South Korea, which competes almost head-to-head with Japan in the export markets.

What is allowing countries that have taken action to cut their interest rates has been the slowing inflation.

The steep fall in crude oil prices since June last year to below US$50 a barrel has eased inflationary pressure worldwide, as energy is usually the biggest component of inflation. It’s been reported that over the past six months, 18 out of 50 MSCI countries have cut rates.

The Reserve Bank of India, which has an inflation targeting policy, cut interest rates this month. India, along with Denmark, Switzerland, Canada, Egypt and Turkey, has cut interest rates this month itself.

That was followed by Singapore’s move to slow its rise against a basket of currencies, which saw the Singapore dollar continue its recent drop against the US dollar.

Falling inflation was the primary reason for the Monetary Authority of Singapore (MAS) to make its pre-emptive move to slow down the appreciation of its currency by reducing the pace of increase. But quite a number do not pin that move as a significant competitiveness boost.

“The adjustment does not translate into a massive competitiveness impact,” says Saktiandi Supaat, Malayan Banking Bhd’s head of foreign exchange (forex) research based in Singapore.

MAS’ next policy statement will be due in April where it could give some clarity on the competitiveness angle, but the drop in the Singapore dollar against the greenback does help to boost inflation, which is expected to be lower than had been earlier estimated. The previous outlook was for a -0.5% to 0.5% rise in inflation.

A slower rate of appreciation would also help Singapore’s economy, which is already dealing with cost pressures from a tight labour market where the unemployment rate was a meagre 1.6%.

Furthermore, with non-oil domestic exports reportedly dropping for the past two years, a weaker Singapore dollar will help, especially when exports to China and the United States have fallen on a year-on-year basis.

Pressure is also emerging in Thailand, where the stronger baht is also not helping with exports, which dropped 0.4% last year.

Finance Minister Sommai Phasee was recently reported to have said that the Thai central bank should “in theory” lower borrowing costs, and that exports are under pressure from a stronger baht.

Fundamentals back appreciation

The Philippine peso and the baht are two currencies in this region that have in recent months seen an appreciation against the dollar. The reason for this is that the fundamentals of these economies have improved.

“The Philippines is not reliant on commodities as much as Malaysia, Indonesia and Thailand and that is the biggest driver of its currency,” says a currency strategist in Singapore.

“It just registered its strongest gross domestic product (GDP) growth over three years since the 1950s.”

The Philippine economy grew by 6.1% last year after expanding by 7.2% in 2013.

Thailand, recovering from floods and political unrest, has also been a flavour for foreign investors since stability returned.

Its stock market in US dollar terms is now bigger than Bursa Malaysia and one of the reasons for the currency’s rise is the drop in oil prices.

The fall in crude oil prices is expected to have the biggest economic benefit to Thailand and the Philippines among countries in this region, according to Bank of America Merrill Lynch.

“Lower oil prices have not resulted in any sizeable GDP growth upgrade as yet for emerging Asia, in part because of slowing global growth outside the United States.

“Lower oil prices have, however, improved the trade surplus significantly, supporting the current account balance and FX reserves positions.

“Lower oil prices have also resulted in a sharp drop in inflation, particularly in Thailand, the Philippines and India, which has allowed central banks to stay accommodative. Emerging Asian countries will likely see a boost to GDP growth in the range of +10bp to +45bp with every 10% fall in oil prices, if the oil price drop was purely a supply shock,” it says in a note.

The low-inflation environment will also allow central banks in this region to become more accommodative.

“Lower crude oil prices and loose global monetary policy will likely keep inflation lower in 2015 with rising probability of rate cuts in Asean,” says Morgan Stanley in a note.

How low will the ringgit go?

The past three months have been a volatile period for global currencies and no more so when it comes to the ringgit, which is the second-worst performing currency in Asia against the US dollar over the past 12 months after the yen.

Directly, the drop in crude oil prices has affected the fundamentals of Malaysia and carved a chunk out of government revenue, as receipts from crude oil production account for slightly less than 30% of income.

With revenues depleted, the Government has revised its budget for this year to take into account crude oil averaging US$55 a barrel in 2015 from an earlier projection that it would average US$105 a barrel when the budget was announced last October.

The revised budget also led to a slight increase in the fiscal deficit to 3.2% of GDP from an earlier projection of 3%.

That percentage is lower than the 3.5% target for 2014.

Apart from fiscal discipline, the ringgit’s fortunes have been loosely linked to the price of crude oil.

With this July marking the 10th year when the ringgit peg to the US dollar was lifted, the decision to remove the RM3.80 to the US dollar peg was to ensure that the ringgit reflected the fundamentals of the economy.

Prior to that decision, the price of crude oil had started to rise, delivering valuable additional revenue to the Government.

When the peg was lifted, brent crude oil was trading at US$55.72 a barrel, and over the years, the ringgit loosely tracked the value of crude oil, often appreciating against the dollar when crude oil prices were high and weakening when crude oil prices dropped.

Anecdotally, the ringgit gained strength against the dollar when oil prices soared and approached the RM3 to the dollar mark when crude oil hit more than US$140 in 2008.

It dropped in value as crude oil prices retreated from there, and as crude oil prices went up again and stayed at elevated levels for a prolonged period, the ringgit then crossed the RM3 level into the RM2.90 range.

Forex strategists say sentiment does affect the movement of a currency, but it moves in parallel with the fundamentals of an economy. With Malaysia’s fortunes closely linked to the price of crude oil, it is inevitable that the thinking of the country’s fundamentals will also change.

“If energy prices continue to drop, then it will hurt the ringgit,” says a forex strategist based in Singapore.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz recently said the ringgit, which is currently trading at multi-year lows against the US dollar, did not reflect Malaysia’s strong underlying fundamentals.

“Once the global events settle down and stabilise, the ringgit will trend towards our underlying fundamentals,” Zeti told reporters at an event.

Apart from lower crude oil prices, the ringgit has also been hurt by capital outflows.

Malaysia’s forex reserves in the first two weeks of January were at its lowest level since March 2011 and foreign investors held 44% of Malaysian Government Securities (MGS) as of the end of last year.

Analysts say while foreigners have sold off a chunk of government debt, the remaining are not expected to do so as long as they are making a decent return on their holdings. The rise in the value of the 10-year MGS will give support to their holdings.

A number of forex analysts think the ringgit will not slip below RM3.70 to the US dollar, but some do admit they did not think it would be trading at the current level of around RM3.63 a few months ago.

“If it does go to RM3.80, then people will get panicky,” says one forex analyst.

By Jagdev. Singh Sidhu The Star/ANN

Semiconductor and rubber glove makers to gain from weak ringgit

Kenanga Research believes that the semiconductor industry will stay resilient with the global sales continuing to show healthy momentum.

THE decline of the ringgit is generally viewed as a problem for the economy but there are always two sides to the story.

Exporters with high local ringgit-denominated content and strong external demand are the obvious winners as they are expected to benefit from the weakening ringgit.

The winners are said to be the semiconductor and technology, rubber gloves and timber-based sectors. The share prices of a number of those companies have already factored in the benefits to their business from the weaker ringgit after the currency started its decline,which was more pronounced since the beginning of the fourth quarter of last year.

On the semiconductor front, Kenanga Research says believes that industry will stay resilient with the global sales continuing to show healthy momentum. Bottom-fishing is recommended as a strategy especially with the current risk-reward ratio less favourable following rich valuations in some counters.

“Typically, first and last quarters of a calender year, the earnings for the semiconductor players are seasonally weaker.

“That said we see any price weakness in these stocks as opportunities to accumulate as the earnings shortfall could be made up by the seasonally stronger second and third quarters on the back of the resilient industry prospects,” it says in a recent report.

Screening through the semiconductor value chain, Kenanga Research sees Vitrox Corp Bhd, being the leading solution providers of automated vision inspection systems to continue benefiting from the increasing complexity of semiconductor packages, which requires enormous inspection.

The research house is sanguine over OSAT (outsourced chips assembly and testing) players such as Unisem (M) Bhd. Inari Amertron Bhd is among the research house’s top pick.

PIE industrial Bhd managing director Alvin Mui says the group would see its sales rising this first quarter.

“But this is due to the new box built products we are doing for the medical equipment segment.

“The weakened ringgit will of course boost our revenue and bottom line,” Mui says.

Meanwhile, Elsoft Research Bhd chief executive officer CE Tan says the weak ringgit has boosted orders for its LED test equipment for the first quarter of this year.

“We expect to perform by a strong double digit percentage growth over the same period last year,” he says.

Tan says the LED testers the group produces are niche products with competitive pricing.

Rubber gloves players have seen strong price appreciation since late last year. Maybank IB Research likes Kossan Rubber Industries Bhd due to its stronger earnings growth in financial years 2015 and 2016, underpinned by the full contributios of its latest three plants.

Meanhile, JF Apex Securities mentions Latitude Tree, Poh Huat and Heveaboard among the timber-based industry stocks that can benefit from strengthening US dollar against ringgit.

The US market is the biggest for the industry which will gain from cheaper ringgit-denominated local content and stronger US economic growth.

The losers from a weaker ringgit, JF Apex Securities Bhd senior analyst Lee Cherng Wee mentions, are automotive players which import a lot of parts especially for completely-knocked down vehicles.

Lee says counters such as Tan Chong Motors and UMW Holdings are likely to be affected.

RHB Research in a recent report says about 60% of Tan Chong’s manufacturing cost of sales is transacted in foreign currency (80% in US dollars) which RHB sees as a risk.

“Continued US dollar strength will crimp margins that will not be offset by a weaker Japanese yen,” it says.

Lee also predicts the consumer sector players with high imported content in dollar terms could risk slimmer margins coupled with sluggish consumer sentiment due to goods and services tax.

MIDF Investment Research analyst Kelvin Ong said he foresees banking groups with higher foreign shareholdings like CIMB Group Holdings Bhd, Alliance Financial Group Bhd, AMMB Holdings Bhd and Public Bank Bhd as banks that can be impacted by the weaker ringgit.

“Foreign shareholding may slip if the domestic currency continues to weaken. The Fed’s tightening of the interest rate turns out to be more aggressive than expected, and crude oil prices continue to be on a downward trend. This will impact valuations of banks, but on the flip side, it will present buying opportunities for investors on a more attractive valuation,’’ he says.

By Sharidan M. Ali and David Tan The Star/ANN

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Ringgit Malaysia slides to lowest vs USD: fears of low oil prices, rate hike, rethink study options

PETALING JAYA: The ringgit has fallen to its lowest against the US dollar since August 2009 amid concerns over the impact of low oil prices on Malaysia’s economy and the timing of US interest rate hike.

At 5pm yesterday, the ringgit was quoted at 3.5425 against the US dollar, which has been gaining strength against all major currencies in the world. That represented a weakening of 10.81% for the ringgit against the US dollar in the last six months.

According to independent economist Lee Heng Guie, the ringgit would likely remain under downward pressure as investors were concerned about the impact of falling crude oil prices on Malaysia’s economy.

Malaysia, which is a net exporter of crude oil and petroleum, is seen as the biggest loser in Asean of lower oil prices.

“Being a net oil and gas exporter, it will cause a sharp slowdown in oil and gas investments and affect the Government’s ability to spend as it struggles to manage its fiscal deficit on account of falling oil revenue,” RHB Research Institute said in a recent report.

Low oil prices would result in some loss of income for Malaysia through lower dividends from state oil producer Petroliam Nasional Bhd and lower tax and excise duties. Petroleum-related revenues account for around 30%-40% of total government revenue each year.

Savings from recent subsidy reforms might not be sufficient to offset the loss in income for the Government that was looking to cut its fiscal deficit to 3% of gross domestic income (GDP) in 2015 from 3.5% of GDP this year, economists said.

There were divided views as to whether Malaysia would momentarily slip into twin deficits, a situation where an economy is running both fiscal and current deficits, in the coming months.

Brent crude oil, an international benchmark, fell to a fresh five-year low at 5pm yesterday when it was quoted at US$54.23 (RM192.11) per barrel. That represented a decline of more than half from the peak of around US$115 (RM406.80) per barrel in mid-June.

Investors are expecting the US Federal Reserve to raise interest rates in the coming months, following the end of its third round of quantitative easing (QE3) programme last October.

QE3, which was launched in September 2012, involved the buying of long-term US Treasury bonds to push long-term interest rates low to support the country’s economic recovery.

In the last six months, the ringgit had also weakened against other regional currencies, including the Singapore dollar, against which it fell 3.63% to 2.6493. The ringgit fell 0.91% against the South Korean won to 0.3184; and 2.9% against the Indonesian rupiah to 0.02801.

Nevertheless, the ringgit had appreciated against the British pound, euro, Australian dollar and Japanese yen over the last six months.

Yesterday, the ringgit was quoted at 5.4080 against the pound, 4.2249 against the euro, 2.8541 against the Australian dollar and 2.9397 against 100 yen.

By Celilia Kok The Star/Asia News Network

Weakening ringgit forces parents to rethink study options

PETALING JAYA: Parents planning to send their children to study overseas, particularly the United States, are beginning to feel the pinch with the ringgit continuing its slide against the greenback.

Many are reconsidering their options by looking at other destinations for their children’s higher studies.

Some are also planning to shorten the study period of their children to cope with the extra costs incurred, while there are those who are thinking of asking their children to take up part time jobs to help finance their education.

The ringgit has slipped to its lowest since August 2009 at 3.5280 to the US dollar.

A media practitioner said he enrolled his daughter for an American degree programme with a local college two years ago.

“She’s doing a twinning course with two of the four years to be spent in the US. At that time, the ringgit was holding up fairly well against the US dollar.

“With the ringgit’s slide now, I’ll have to cough up much more to finance my daughter’s studies in the US,” he said.

Retired pilot Wong Yoon Fatt, a father of two, said he planned to send his 18-year-old daughter overseas as he had saved up funds for his children’s education.

“However, if the ringgit continues to weaken, I may shorten the duration of their studies abroad. From three years, I may consider cutting it to just a year or two abroad,” he said, adding that he would encourage his children to take up part-time jobs during their vacation.

Housewife Noorhaidah Mohd Ibrahim, 61, said if the economic situation worsened, she was prepared to send her 21-year-old daughter Tasneem to study at a local university.

“If we can get the same quality of education here, then why not?” she said, adding that she was planning to send Tasneem to pursue higher education in Britain.

Mass communication student S. Samhitha, 21, said she had a choice of continuing her final-year overseas but opted to stay back because of increasing costs to study abroad. “I can still get the same degree here. However, the thing I will miss is the exposure of studying in a different country,” she said.

Law student Janani Silvanathan, who is in Britain, said she would feel the pinch of the weakening ringgit in her next term when she would have to travel back and forth from Bristol to London weekly.

“Transportation will be more expensive. A train ticket from Bristol to London costs RM180 each now,” the 24-year-old lamented. A 20-year-old film making student who identified herself as Stephanie said she was planning to study in Canada but would have take up a part-time job.

“The depreciating ringgit will not severely affect me but my parents will definitely incur higher costs,” she said.

Law student Lisa J. Ariffin, 25, who is studying in Cardiff, Wales, said she was more careful in spending money, even on food.

“I can’t eat out as often and will always look out for good bargains or offers,” she said.

By Yuen Meikeng The Star/Asia News Network

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Global bank profits hit US$920bil, China accounted for 1/3 total; Globalized RMB to stabilize world economy

LONDON: China's top banks accounted for almost one-third of a record US$920 billion of profits made by the world's top 1000 banks last year, showing their rise in power since the financial crisis, a survey showed on Monday.

China's banks made $292 billion in aggregate pretax profit last year, or 32 percent of the industry's global earnings, according to The Banker magazine's annual rankings of the profits and capital strength of the world's biggest 1,000 banks.

Last year's global profits were up 23 percent from the previous year to their highest ever level, led by profits of $55 billion at Industrial and Commercial Bank of China (ICBC). China Construction Bank, Agriculture Bank of China and Bank of China filled the top four positions.

Banks in the United States made aggregate profits of $183 billion, or 20 percent of the global tally, led by Wells Fargo's earnings of $32 billion.

Banks in the eurozone contributed just 3 percent to the global profit pool, down from 25 percent before the 2008 financial crisis, the study showed. Italian banks lost $35 billion in aggregate last year, the worst performance by any country.

Banks in Japan made $64 billion of profit last year, or 7 percent of the global total, followed by banks in Canada, France and Australia ($39 billion in each country), Brazil ($26 billion) and Britain ($22 billion),The Banker said.

The magazine said ICBC kept its position as the world's strongest bank, based on how much capital they hold - which reflects their ability to lend on a large scale and endure shocks.

China Construction Bank jumped to second from fifth in the rankings of strength and was followed by JPMorgan , Bank of America and HSBC .

ICBC, which took the top position last year for the first time, was one of four Chinese banks in the latest top 10.

Wells Fargo has this year jumped to become the world's biggest bank by market value, after a surge in its share price on the back of sustained earnings growth. Its market value is $275 billion, about $75 billion more than ICBC.

The Banker said African banks made the highest returns on capital last year of 24 percent - double the average in the rest of the world and six times the average return of 4 percent at European lenders.- Reuters

Globalized RMB to stabilize world economy

BEIJING, June 27 (Xinhua) -- The globalization of the yuan, or renminbi (RMB), will not only benefit the Chinese economy, but generate global economic stability, a senior banker has said.

The yuan did not depreciate during the 1997 Asian financial crisis or the 2008 global financial crisis, helping stabilize the global economy, Tian Guoli, chairman of the Bank of China, said at a forum in London last week, according to the Friday edition of the People's Daily.

China's economy ranks second in the world and its trade ranks first, so it is thought that use of the RMB in cross-border trade will be a mutually beneficial move for China and its trade partners.

The yuan has acquired basic conditions to become an international currency as China's gross domestic product took 12.4 percent of the world's total and its foreign trade 11.4 percent of the world's total in 2013, Tian said.

According to the central bank, RMB flow from China hit 340 billion yuan (55.74 billion U.S. dollars) in the first quarter of 2014, replenishing offshore RMB fluidity. The balance of offshore RMB deposits hit 2.4 trillion yuan at the end of March, 1.51 percent of all global offshore deposits. Offshore trade between the yuan and foreign currencies doubled in the first quarter from the fourth quarter of last year.

Analysts widely forecast five steps in RMB internationalization: RMB used and circulated overseas, RMB as a currency of account in trade, RMB used in trade settlement, RMB as a currency for fundraising and investment, and RMB as a global reserve currency.

Already, some neighboring countries and certain regions in developed countries are circulating RMB, indicating the first step has been basically achieved.

Data provider SWIFT's RMB tracker showed that in May, 1.47 percent of global payments were in RMB, a tiny amount compared to the global total but up from 1.43 percent in April. This indicated progress in the second and third steps.

Some countries in southeast Asia, Latin America and Africa have or are ready to take RMB as an official reserve currency. It indicated the fourth and the fifth steps are burgeoning.

Investors are also optimistic about RMB globalization. Bank of China's global customer survey shows that over half of the respondents expect RMB cross-border transactions to rise by 20 to 30 percent in five years. And 61 percent of overseas customers say they plan to use or increase use of RMB as a settlement currency.

Li Daokui, head of the Center for China in the World Economy under Tsinghua University, said RMB internationalization is a long-term process and should be made gradually based on China's financial reforms, including freeing interests and reforms on foreign exchange rates.

Dai Xianglong, former central bank governor of China, forecast that it will take about 10 to 15 years to achieve a high standard of RMB internationalization.

Among the latest moves toward RMB internationalization is the naming of two clearing banks to handle RMB business overseas.

The central bank announced last Wednesday that it has authorized China Construction Bank to be the clearing bank for RMB business in London, and the next day named the Bank of China as clearing bank for RMB business in Frankfurt.- Xindua

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Currency War & Exchange Rates Tension!

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Tension over exchange rates

WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

Amid heightened fears over eurozone sovereign debt risks and increasing concerns about the health of the United States and eurozone economies, worried investors have flocked to the safety of haven currencies, especially the Swiss franc, and gold.

While investors and speculators have since moved aggressively to buy gold, the switch from being large sellers to buying by a number of emerging nation's central banks (Mexico, Russia, South Korea and Thailand) has helped propel the price of gold more than 25% higher this year, hitting a record US$1,920 a troy ounce earlier this month. At a time of high uncertainty in the face of the International Monetary Fund's (IMF) latest gloomy forecast on global growth, few central banks relish the prospect of a flood of international cash pushing their currencies higher.

Massive over-valuation of their currencies poses an acute threat to their economic well-being, and carries the risk of deflation.

The Swiss franc

Switzerland's national currency, the CHF, should be used to speculative attacks by now. So much so in the 1970s, the Swiss National Bank (SNB) was forced to impose negative interest rates on foreign investors (who have to pay banks to accept their CHF deposits).

And, it has been true in recent years, with the CHF rising by 43% against the euro since the start of 2010 until mid-August this year. There does not seem to be an alternative to the CHF as a safe haven at the moment.

With what's going on in the United States, eurozone and Japan, investors have lost faith in the world's two other haven currencies: US dollar (USD) and the yen.

This reflects the Federal Reserves' ultra-loose policy stance and the political fiscal impasse in the United States which have scared away investments from the dollar. The prospect that Tokyo might once again intervene to limit the yen's strength has deterred speculators from betting on further gains from it. To be fair, the CHF has also benefitted from recent signs that the Swiss economy, thanks in large part to its close ties to a resurgent Germany, is thriving.

But enough is enough. SNB made a surprising announcement on Sept 6 that it would buy foreign currencies in “unlimited quantities” to combat a huge over-valuation of the CHF, and keep the franc-euro exchange rate above 1.20 with the “utmost determination.”

On Aug 9, the CHF reached a new record, touching near parity against the euro from 1.25 at the start of the year, while the USD sank to almost CHF 0.70 (from 0.93). The impact so far has been positive: the euro rose 8% on that day and the 1.20 franc level had since stabilised. It was a gamble.

Of course, SNB had intervened before in 2009 and 2010, but in a limited way at a time when the euro was far stronger. But this time, with the nation's economy buckling under the currency's massive over-valuation, the risks of doing nothing were far greater. In July last year, following a chequered history of frustrated attempts, SNB vowed it would not intervene again. By then, the central bank was already awash with foreign currency reserves. Worse, the CHF value of these reserves plunged as the currency strengthened. In 2010, SNB recorded a loss of CHF20 billion, and a further CHF10 billion in 1H'11. As a result, SNB came under severe political pressure for not paying the expected dividend. But exporters also demanded further intervention to stop the continuing appreciation.

This time, SNB is up against a stubborn euro-debt crisis which just won't go away. True, recent efforts have been credible. Indeed, the 1.20 francs looks defensible, even though the CHF remains over-valued. Fair value appears to be closer to 1.30-1.40. But inflation is low; still, the risk of asset-price bubbles remains. What's worrisome is SNB acted alone. For the European Central Bank (ECB), the danger lies in SNB's eventual purchases of higher quality German and French eurozone government bonds with the intervention receipts, countering the ECB's own intervention in the bond market to help weaker members of Europe's monetary union, including Italy and Spain.



This causes the spread between the yields of these bonds to widen, and pile on further pressure on peripheral economies. Furthermore, unlimited Swiss buying of euro would push up its value, adding to deflationary pressures in the region.

The devil's trade-off

As I see it, the Swiss really has no other options. SNB has been attempting to drive down the CHF by intervening in the money markets but with little lasting effect. “The current massive over-valuation of the CHF poses an acute threat to the Swiss economy,” where exports accounted for 35% of its gross domestic product. The new policy would help exports and help job security. As of now, there is no support from Europe to drive the euro higher.

SNB is caught in the “devil's trade-off,” having to choose risking its balance sheet rather than risk “mounting unemployment, deflation and economic damage.” The move is bound to cause distortions and tension over exchange rates globally.

New haven: the Nokkie'

SNB's new policy stance has sent ripples through currency markets. In Europe, it drove the Norwegian krone (Nokkie) to an eight-year high against the euro as investors sought out alternative safe havens. Since money funds must have a minimum exposure in Europe and, with most European currencies discredited and quality bonds yielding next to nothing, the Nokkie became a principal beneficiary. It offers 3% return for three-month money-market holdings.

Elsewhere, the Swedish krona also gained ground, rising to its strongest level against the euro since June after its central bank left its key interest rates unchanged, while signalling that the rate will only creep up. What's worrisome is that if there is continuing upward pressure on the Nokkie or the krona, their central banks would act, if needed with taxes and exchange controls. With interest rates at or near zero and fiscal policy exhausted or ruled out politically in the most advanced nations, currencies remain one of the only policy tools left.

At a time of high uncertainty, investors are looking for havens. Apart from gold and some real assets, few countries would welcome fresh inflows which can stir to over-value currencies. Like it or not, speculative capital will still find China and Indonesia particularly attractive.

Yen resists the pressure 

SNB's placement of a “cap” to weaken the CHF has encouraged risk-adverse investors who sought comfort in the franc to turn to the yen instead. So far, the yen has stayed below its record high reached in mid-August. But it remains well above the exporters' comfort level.

Indeed, the Bank of Japan (BoJ) has signalled its readiness to ease policy to help as global growth falters. But so far, the authorities are happy just monitoring and indications are they will resist pressure to be as bold as the Swiss, for three main reasons: (i) unlike to CHF, the yen is not deemed to be particularly strong at this time it's roughly in line with its 30-year average; (ii) unlike SNB, Japan is expected to respect the G-7's commitment to market determined exchange rates; and (iii) Japan's economy is five times the size of Switzerland and the yen trading volume makes defending a pre-set rate in the global markets well-nigh impractical.

Still, they have done so on three occasions over the past 12 months: a record 4.51 trillion yen sell-off on Aug 9 (surpassing the previous daily record of 2.13 trillion yen from Sept 2010).

The operation briefly pushed the USD to 80.25 yen (from 77.1 yen) but the effects quickly waned and the dollar fell back to a record low of 75.9 yen on Aug 19. But, I gather the Finance Ministry needs to meet three conditions for intervention: (a) the yen/USD rate has to be volatile; (b) a simultaneous easing by BoJ; and (c) intervention restricted to one day only.

Given these constraints, it is no wonder MOF has failed to arrest the yen's underlying trend. In the end, I think the Japanese has learnt to live with it unlike the Swiss who has the motivation and means to resist a strong currency.

Reprieve for the yuan 

I sense one of the first casualties of the failing global economic expansion is renewed pressure to further appreciate the yuan. For China, August was a good month to adjust strong exports, high inflation and intense international pressure. As a result, the yuan appreciated against the USD by more than 11%, up from an average of about 5% in the first seven months of the year. However, the surge had begun to fade in the first half of September.

But with the United States and eurozone economic outlook teetering in gloom, China's latest manufacturing performance had also weakened, reflecting falling overseas demand.

This makes imposing additional currency pressure on exporters a no-go. Meanwhile, inflation has stabilised. Crude oil and imported food prices have declined, reducing inflationary pressure and the incentive to further appreciate the yuan. Looks like September provided a period of some relief. But, make no mistake, the pressure is still there. The fading global recovery may have papered over the cracks. Pressure won't grind to a halt.

Central banks instinctively try to ward-off massive capital flows appreciating their currencies. There are similarities between what's happening today, highlighted by the recent defensive move by SNB, and the tension over exchange rates at last year-end. It's an exercise in pushing the problem next door.

This can be viewed as a consequence of recent Japanese action (Tokyo's repeated intervention to sell yen). It threatens to start a chain of responses where every central bank tries to weaken its currency in the face of poor global economic prospects and growing uncertainty. So far, the tension has not risen to anything like last year's level. But with rising political pressure provoking resistance to currency appreciation, the potential for a fresh outbreak remains real. The Brazilian Finance Minister just repeated his warning last year that continuing loose US monetary policies could stoke a currency war.

Growing stress

With the euro under growing stress from sovereign debt problems, the market's focus is turning back to Japan (prompting a new plan to deal with a strong yen), to non-eurozone nations (Norway, Denmark, Sweden and possibly the United Kingdom) and on to Asia (already the ringgit, rupiah, baht and won are coming under pressure on concerns over uncertainty and capital flight). Similarly, Brazil's recent actions to limit currency appreciation highlights the dilemma faced by fast growing economies (Turkey, Chile and Russia) since allowing currency appreciation limits domestic overheating but also undermines competitiveness.

This low level currency war between emerging and advanced economies had further unsettled financial markets.

Given the weak economic outlook, most governments would prefer to see their currencies weaken to help exports. The risk, as in the 1930s, is not just “beggar-thy-neighbour” devaluations but resort to a wide range of trade barriers as well. Globally co-ordinated policies under G-20 are preferred. But that's easier said than done.

So, it is timely for the IMF's September “World Economic Outlook” to warn of “severe repercussions” to the global economy as the United States and eurozone could face recession and a “lost decade” of growth (a replay of Japan in the 90s) unless nations revamped economic policies. For the United States, this means less reliance on debt and putting its fiscal house in order.

For the eurozone, firm resolution of the debt crisis, including strengthening its banking system. For China, increased reliance on domestic demand. And, for Brazil, cooling an over-heating economy. This weekend, the G-20 is expected to take-up global efforts to rebalance the world overwhelmed by heightened risks to growth and the deepening debt crisis. Focus is expected on the role of exchange rates in rebalancing growth, piling more pressure on China's yuan.

Frankly, IMF meetings and G-20 gatherings don't have a track record of getting things done. I don't expect anything different this time. The outlook just doesn't look good.

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.